Image: Compass Minerals.
Winter weather is a hassle for many people, but for road-salt provider Compass Minerals International (CMP 2.78%), it's a major profit center. Just as Douglas Dynamics (PLOW 1.83%) profits from providing snowplows and other equipment for handling snow, Compass Minerals does well when municipalities have to stock plenty of ice-fighting minerals to keep their roads clear. Coming into its fourth-quarter financial report on Monday, however, Compass investors were bracing for what had been a warm start to the season. Even though the company managed to do better than most had expected and raised its dividend, shareholders didn't react well to the news. Let's take a closer look at how Compass Minerals did and what it says about the company's prospects for 2016.
How Compass surprised investors
Compass Minerals' fourth-quarter results weren't nearly as bad as most investors were prepared to see. Sales dropped by a third to $289.3 million, exactly matching the consensus forecast among those following the stock. But the 27% drop in net income was slightly gentler than the revenue shortfall, and earnings of $1.72 per share were almost $0.20 higher than most investors were expecting.
Looking more closely at Compass Minerals' numbers, you can see the impact of weather on its results. In the road-salt segment, revenue dropped 34%, and drops of 32% in the highway deicing subcategory and 17% for consumer and industrial products pulled overall results downward. Selling prices were 14% lower than last year because of less favorable contract provisions. Interestingly, though, operating profit margins rose by two percentage points, and that limited the damage on the salt-segment's EBITDA to 28%.
Compass actually spelled out its estimate of the impact of poor weather conditions. The company said that the number of recordable snow events in the 11 cities it tracks fell by more than half from 2014's winter, which already was below the long-term average. Compass therefore believes that sales took a $75 million to $85 million hit, and operating earnings fell $35 million to $40 million. Douglas Dynamics hasn't revealed how the warm winter weather affected it during the quarter, but it's likely to see similar negative impacts.
Compass Minerals also suffered from weak agricultural market conditions in its plant nutrition business. Sales volumes dropped 41%, and even a 12% rise in average selling prices that stemmed largely from a more favorable product mix only managed to limit declines in revenue and earnings to roughly a third.
CEO Fran Malecha summarized the situation for Compass Minerals succinctly. "A combination of limited snow events and warm weather significantly reduced fourth quarter demand of our deicing products," Malecha said. Still, the CEO noted that even with that weakness, full-year adjusted earnings were down only slightly, and Compass managed to execute on internal cost-cutting strategies to offset financial challenges.
Can Compass Minerals become cool again?
Compass expects further difficulties in the coming year. In Malecha's words, "As we enter 2016, we believe market conditions will likely be challenging, and we are taking the necessary steps to align production with current demand and create a leaner organization for long-term success."
Compass Minerals' guidance for 2016 reflects that uncertainty. The company believes that as long as winter weather gets closer to normal -- something we've already seen with major snowstorms in the mid-Atlantic states -- salt-segment sales volumes in 2016 should actually exceed the final numbers for 2015. However, the agricultural segment remains under pressure, and the dollar's strength is likely to keep costing the company because of higher import prices for potash.
In terms of hard numbers, Compass expects earnings of $3.80 to $4.20 per share for the full 2016 year. That's considerably below the $4.80 per share that most investors had expected. Compass will also take steps to review costs and improve inventory handling, and it expects to cut 150 jobs as a result.
Those issues didn't stop Compass from rewarding shareholders. The company raised its dividend by 5% to $0.695 per share quarterly. The move marks the 13th straight year that shareholders have gotten bigger payouts from Compass.
Even with the dividend hike, Compass Minerals investors weren't happy with that guidance, sending the stock down 4% in after-market trading following the announcement. Unless the weather starts to behave more normally, Compass could remain under pressure until next winter gives its road-salt segment another chance to shine.
